1

In Re Reilly, Revamping Taylor in Contravention of the Code

by

Thomas J. Rheaume Jr.

Submitted in partial fulfillment of the requirements of the King Scholar Program

Michigan State University College of Law under the direction of

Professor Lawton Spring, 2010

2

INTRODUCTION

Plagued by an ever growing mountain of debt, an individual may find himself with no

other choice than to file a petition with the bankruptcy court. Filing a petition starts the process

by which a debtor may receive a discharge from certain debts that arose before the petition was

filed, subject to certain exceptions.1 In order to receive a discharge a debtor must comply with

various provisions of the Bankruptcy Code including filing a schedule of assets and liabilities.2

Some of the assets listed may be exempted and retained by the debtor to help start anew.3 Others

will be sold by the trustee and the proceeds used to pay off creditors.4 Specific substantive rules

govern the process through which assets are either sold or exempted under the Bankruptcy

Code.5 Procedural rules, defined in the Bankruptcy Code and supplemented by the Federal Rules

of Bankruptcy Procedure provide additional guidance to debtors and trustees regarding the time

frame for claiming and objecting to property claimed as exempt.6 The Bankruptcy rules are

promulgated by the Supreme Court rather than Congress. “Such rules shall not abridge, enlarge,

or modify any substantive right.”7

Courts have generally looked to the Supreme Court’s decision in Taylor v. Freeland &

Kronz, to determine whether a debtor may retain assets listed as exempt if the trustee fails to

follow these specific procedural rules, which are designed to effectuate efficiency in the

bankruptcy process.8 In Taylor, the Court held the trustee’s failure to object within FRBR

4003(b)’s 30-day requirement rendered the property fully exempt even though the debtor had no

1 See 11 U.S.C. § 727(b). 2 See 11 U.S.C. § 521(B)(i). 3 See discussion infra Part I.B. 4 See discussion infra Part I.B. 5 See discussion infra Part I.B. 6 See discussion infra Part I.B. 7 28 U.S.C. § 2075. 8 See generally Taylor v. Freeland & Kronz, 503 U.S. 638 (1992).

3

colorable basis for claiming the proceeds of the lawsuit as exempt.9 In the 18 years since this

decision was announced, bankruptcy and appellate courts have differed as to its holding,

meaning, context and application.10 For example, the Eight Circuit has held that Taylor does not

apply where the debtor intends to only partially exempt an asset claimed as exempt, but only

where the debtor claims the full amount as exempt.11 In contrast, the Third Circuit has held that

Taylor requires the trustee to object where a debtor lists an identical entry for the property’s

value and the amount of the exemption, otherwise the property is fully exempt.12 The Supreme

Court has granted certiorari in In re Reilly to clarify ambiguities that have developed in applying

Taylor.13 Implementation of the Eighth Circuit’s decision in In re Wick is consistent with the

plain meaning of the exemption provisions, accounts for the specific monetary limitations as well

as the standard for valuation of exemptions imposed by Congress and better effectuates the

purposes and polices of the Bankruptcy Code

This Comment examines the Bankruptcy Code’s exemption statute, Section 522,

specifically whether a debtor may exempt property in its entirety merely by indicating that the

value of the property is identical to the claimed exemption. Part I of this Comment provides a

brief overview of the policies underlying the Bankruptcy Code. This Part also provides an

overview of the Bankruptcy Code’s exemption statute, its procedure and application. Part II.A

analyzes Taylor v. Freeland & Kronz, a Supreme Court decision interpreting the exemption

provision and FRPB 4003(b). Part II.B discusses the Eighth Circuit’s decision in In re Wick,

which rejects the proposition that one exempts an asset in its entirety by listing both the value of

the property and the value of the exemption as unknown. Part II.C discusses the Third Circuit’s

9 Id. at 642-44. See also discussion infra Part II.A. 10 See discussion infra Part II. 11 See In Re Wick, 276 F.3d 412 (8th Cir. 2002). 12 See In re Reilly, 534 F.3d 173 (3d Cir. 2008). 13 See In re Reilly, 534 F.3d 173 (3d Cir. 2008), cert. granted, 77 U.S.L.W. 3267 (U.S. Apr. 27, 2009) (No. 08-538).

4

decision in In re Reilly, which holds that a debtor signals her intention to exempt property “in

kind” by listing identical entries for the value of the property and the amount of the claimed

exemption. Part III argues that the Supreme Court should resolve the circuit split in accordance

with In re Wick because this standard is more consistent with the plain language of the

Bankruptcy Code, its policies and procedure.

I. THE BANKRUPTCY CODE: POLICIES AND PROCEDURES

A. Policy

Article I § 8 grants Congress the power to establish uniform Laws on the subject of

Bankruptcies throughout the United States.14 Bankruptcy laws were believed by the Framers to

be incorporated in the Constitution because of problems that varying state laws caused for

creditors and interstate commerce.15 The central focus of this Comment is a Chapter 7

bankruptcy case, which allows a debtor to discharge all of his or her debts that arose before the

commencement of the case.16 In exchange for a general discharge, the debtor is required to turn

over all nonexempt property to the trustee for sale and distribution according to a structured

priority scheme.17 The Bankruptcy Code attempts to balance two competing objectives in a

Chapter 7 case: fair distribution of the debtor’s assets for the benefit of creditors and to provide

debtor’s a “fresh start.”18 The Code effectuates these policies through its various provisions.

In order to provide debtors a “fresh start” the Bankruptcy Code entitles a debtor to

exempt certain property so that it will not be available to his or her creditors.19 “The purpose of

exemptions is to make possible the debtor’s fresh start by allowing him or her to keep those

14 U.S. CONST. art. I, § 8, cl. 4. 15 Charles Jordan Tabb, The History of the Bankruptcy Laws in the United States, 3 AM. BANKR. INST. L. LEV. 5, 13 (1995). 16 See generally 11 U.S.C. § 727. 17 See 11 U.S.C. §§ 507, 522, 541, 542. 18 19 See generally, 11 U.S.C. § 522(d). See also discussion infra Part I.B.

5

items of property deemed reasonably necessary to daily life. They preserve the debtor’s dignity

and give the debtor some basis upon which to build a new life.”20 The Code balances the need

for providing a debtor with a “fresh start” against the equally important principle of equal

treatment of creditors. For example, Section 522 places certain monetary amounts on claimed

exemptions that a debtor may take.21 Additionally, to provide equal distribution to creditors, the

Bankruptcy Code allows remaining property of the estate to be sold and divided among

creditors.22 Creditors are not necessarily treated “equally” across the board; rather, certain

creditors such as secured creditors are given priority treatment over all unsecured creditors as to

their secured collateral.23 As for unsecured creditors, the Code provides a priority scheme that

allows specific unsecured creditors, such as domestic support obligations, to be paid in full

before general unsecured creditors.24 As the Supreme Court stated in Williams v. U.S. Fid. &

Guar. Co., “[i]t is the purpose of the bankrupt[cy] act to convert the assets of the bankrupt into

cash for distribution among creditors, and then to relive the honest debtor from the weight of

oppressive indebtedness, and permit him to start afresh free from the obligations and

responsibilities consequent upon . . . . misfortunes. And nothing is better settled than that

statutes should be sensibly construed with a view to effectuating the legislative intent.”25

B. Procedure

20 2 Collier on Bankruptcy ¶ 2.05. 21 See generally, 11 U.S.C. § 522(d)(1). 22 See generally, 11 U.S.C. § 726. 23 See 11 U.S.C. § 506(a)(1). If a secured creditor’s claim exceeds the value of the collateral, they are allowed an unsecured claim and gave no priority over other unsecured claims. Id. However, if the value of the property exceeds the amount of a secured creditor’s claim, the secured creditor is entitled to interest, reasonable fees, costs, or other charges provided in their security agreement. 11 U.S.C. § 506(a)(2). 24 See 11 U.S.C. §§ 726(b), 507(a). 25 See 236 U.S. 549, 555 (1915) (citations omitted).

6

A debtor commences a case by filing a petition for relief with the bankruptcy court.26

Once a petition is filed a bankruptcy estate arises by operation of law comprised of “all legal or

equitable interests of the debtor in property as of the commencement of the case.”27 Property of

the estate is then subject to sale and distribution for the benefit of creditors.28 To effectuate the

Bankruptcy Code’s policy of a fresh start, the Code provides that debtors may exempt certain

property from sale and distribution for the benefit of creditors.29 Section 522 allows a debtor to

choose between the federal exemption statute, Section 522(d), or their states’ exemption statute.

Additionally, Section 522(b)(2) allows a state to “opt out” of the federal exemption provisions by

statute.30 A majority of states have chosen to “opt out” of the federal exemption scheme, thereby

denying their citizens the right to elect the federal exemptions.31 In fact, many states exemption

statutes reduce the amount of applicable exemptions compared to the federal statute.32 For

purposes of this Comment, references will be made to the federal exemption statute.

The federal exemption statute lists classes of property that a debtor may exempt. For

example, the statute allows a debtor to exempt, among other things, real or personal property that

the debtor uses as a residence (homestead exemption), an interest in one motor vehicle,

26 11 U.S.C. § 301(a). 27 11 U.S.C. § 541(a)(1). 28 See 11 U.S.C. §§ 363(b)(1), 726(a). 29 See generally 11 U.S.C. § 522. See also Richard E. Flint, Bankruptcy Policy: Toward a Moral Justification for Financial Rehabilitation of the Consumer Debtor, 48 WASH. & LEE. L. REV. 515, 543 (1991) (“Under principles of distributive justice, each individual in our society is entitled to a level of human dignity. In order to achieve that dignity the individual must be provided with a minimum level of subsistence and the opportunity to provide himself and his family without the burden of overwhelming debt.”) 30 See 11 U.S.C. § 522(b)(1). § 522 provides that a state may “opt-out” of the federal exemption statute by specifically enacting a statute that does not authorize debtors domiciled in the state to use the federal exemptions. § 522(b)(2). 31 See 4 Collier on Bankruptcy ¶ 522.05. The following states have elected under 11 U.S.C. § 522(b)(2) “opt out” of the federal exemption scheme: Alabama, Arizona, California, Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming. Id. at note 5. 32 Id. But cf. infra note 34.

7

household goods, jewelry, tools of the trade, health aids and life insurance policies.33 On its face

the exemption statute seems quite generous, but for certain types of exempt property a maximum

amount is stated capping the allowable exemption.34 For instance, a debtor’s homestead

exemption is limited to $20,200 in value and her interest in a motor vehicle may not exceed

$3,225.35 Subject to limited exceptions, property exempted under Section 522 is not liable

during or after the case for any debt that arose before the commencement of the case.36

In order to claim an applicable exemption a debtor must file a list of property claiming to

be exempt.37 Federal Rule of Bankruptcy Procedure 1007 directs the debtor to file a schedule of

assets on Official Form 6C, titled “Schedule C – Property Claimed as Exempt” (hereinafter

“Schedule C”).38 Schedule C requires the debtor to describe the property, specify the law

providing each exemption, state the value of the claimed exemption and the current value of the

property without deducting the exemption.39 Because exemption provisions are often limited

according to the nature of the property (or its value) the information provided by Schedule C is

essential to evaluate the propriety of the claimed exemption.40 Section 522 provides that unless a

33 See generally 11 U.S.C. § 522(d). 34 See id. § 522(d). If a married couple is filing jointly, § 522(m) permits them to double their allowable exemptions. 35 Id. § 522(d)(1)-(2). In some regards, it may prove advantageous to choose a state’s exemption statute over the federal exemptions. For example, § 522(d)(1) limits the homestead exemption to $20,200, while Texas allows a homestead, consisting of not more than 10 acres of land, to be exempted in full. See TEX. PROP. CODE ANN. § 41.001 (Vernon 2005). To combat potential problems associated with conversion of non-exempt assets into exempt assets, particularly with regard to unlimited homestead exemptions, Congress enacted § 522(o) (reducing the value of an interest in real property “to the extent that such value is attributable to any portion of any property that the debtor disposed of in the 10-year period ending on the date of the filing of the petition with the intent to hinder, delay, or defraud a creditor and that the debtor could not exempt, or that portion that the debtor could not exempt, under subsection (b), if on such date the debtor had held the property so disposed of,”) and § 522(p) (limiting the debtor’s interest in homestead to $136,875 if the debtor acquired the homestead within 1,215 days of the date of filing the petition)). 36 See 11 U.S.C. § 522(c). 37 11 U.S.C. § 522(l). 38 See generally FED. R. BANKR. P. 1007. In a voluntary case, Schedule C must be filed with the petition or within 14 days thereafter. In an involuntary case Schedule C is required to be filed by the debtor within 14 days of the entry of the order for relief. Id. 39 See Official Form 6C. 40 See 5 Collier on Bankruptcy ¶ 522.05.

8

party in interest objects, the property claimed as exempt on the list is exempt.41 Bankruptcy Rule

4003(b) provides that a “party in interest may file an objection to the list of property claimed as

exempt within 30-days after the meeting of creditors held under § 341(a) is concluded or within

30-days after any amendment to the list or supplemental schedules is filed, whichever is later.”42

If the debtor has fraudulent asserted an exemption, the rule allows the trustee to file an objection

at any time prior to one year after the closing of the case.43 As discussed infra Part II, the

bankruptcy courts have divided about the proper interpretation of Section 522 and the FRBP

4003.

II. TAYLOR V. FREELAND & KRONZ AND ITS PROGENY

In order to more fully understand the circuit split discussed infra, an examination of the

Supreme Court’s jurisprudence on the interplay between Section 522 and FRBP 4003 is

necessary. In Taylor, the Supreme Court granted certiorari to decide whether a trustee may

contest the validity of an exemption after the 30-day period provided by FRBP 4003, even if the

debtor has no colorable basis for claiming the exemption.44 Under a plain meaning approach the

Court held that a trustee may not contest the validity of the exemption after the 30-day period.45

Slightly modified factual variations have led to different interpretations of this decision among

bankruptcy courts.46

A. Taylor v. Freeland & Kronz

41 11 U.S.C. § 522(l). 42 See FED. R. BANKR. P. 4003(b)(1). 43 See FED. R. BANKR. P. 4003(b)(2). This section was added to the rules in 2008. The Advisory Committee notes that “[e]xtending the deadline for trustees to object to an exemption when the exemption claim has been fraudulently made will permit the court to review and, in proper circumstances, deny improperly claimed exemptions, thereby protecting the legitimate interests of creditors and the bankruptcy estate. See FED. R. BANKR. P. 4003(b)(2) advisory committee’s notes. 44 Taylor v. Freeland & Kronz, 503 U.S. 638 (1992). 45 Id. 46 See discussion infra Parts II.B and C.

9

In Taylor, the debtor, Emily Davis, filed a Chapter 7 bankruptcy petition in October of

1984.47 At this time the debtor was also engaged in protracted state court litigation with her

former employer, Trans World Airlines (TWA), for employment discrimination on the basis of

race and sex.48 On her exemption schedules, Davis listed the expected proceeds from the lawsuit

against TWA as exempt, listing its value as “unknown.”49 The trustee did not object to the

claimed exemption.50 Davis received a discharge on October 16, 1985.51 Subsequently, TWA

settled with Davis on the issue of damages, agreeing to pay her $110,000.52 A portion of this

payment was made to her attorneys for their fees.53 After learning of the settlement, the trustee

instituted an action against the debtor and her attorneys to turn the money over to the bankruptcy

estate; the debtor in turn argued that the money was exempt as she had previously indicated on

her schedules.54

The bankruptcy court construed the language of § 522(l) as containing an additional

requirement that there be a statutory basis for a claimed exemption before the failure of any party

in interest to timely object has any legal effect.55 After ruling that the basis of the suit was in tort,

rather than for lost wages, the bankruptcy court held that because there was no statutory basis for

47 Id. at 640. 48 Id. In 1980, Davis secured a ruling in her favor on the issue of liability from the Pittsburgh Human Relations Commission, a damage award was pending. On appeal to the Court of Common Pleas of Allegheny County, the Commission’s decision was reversed. However, the decision of the Commission was reinstated after a favorable ruling for Davis in the Commonwealth Court of Pennsylvania. After Davis filed her Chapter 7 petition, the Pennsylvania Supreme Court affirmed. In re Davis, 105 B.R. 288, 290-91 (Bkrtcy. W.D. Pa. (1989). 49 See Taylor, 503 U.S. at 640. At the Section 341 meeting of creditors, Davis’ lawyers informed the trustee that they estimated Davis may win $90,000 in her lawsuit against TWA. The trustee opined that the proceeds of the lawsuit were property of the estate under Section 541, but doubted that the lawsuit had any value. Id. at 640-41. 50 Id. 51In re Davis, 105 B.R. at 291. 52 See Taylor, 503 U.S. at 641. 53 Id. 54 Id. The trustee brought this proceeding 11 U.S.C. § 549(a), which allows the trustee to avoid a transfer of property of the estate that occurs after the commencement of the case, and 11 U.S.C. § 550(a), which allows recovery by the trustee, after avoidance under § 549, for the benefit of the estate, the property transferred from the initial transferee or any immediate or mediate transferee of such initial transferee. In re Davis, 105 B.R. at 292. 55 In re Davis, 105 B.R. at 292.

10

permitting an exemption for tort recovery, the money was ordered to be returned to the trustee.56

This decision was affirmed by the district court.57 On appeal, the Third Circuit reversed holding

that “in the absence of an objection filed within thirty days after the section 341(a) creditor’s [sic]

meeting or the filing of an amendment to the exemption list, property claimed as exempt by the

debtor is exempt.”58 Because no party in interest objected to the claimed exemption, the

proceeds of the lawsuit were exempt.59

Interpreting section 522(l) and FRBP 4003(b) the Supreme Court ruled even though the

debtor had no colorable basis for claiming the proceeds of her lawsuit as exempt, the trustee’s

failure to object within the time prescribed by FRBP 4003(b) is determinative, and he may not

thereafter challenge the validity of the exemption.60 The Court’s opinion was a pragmatic one.

According to the Court, “[d]eadlines may lead to unwelcome results, but they prompt parties to

act and they produce finality.”61 The Court said that if the trustee is unaware of the potential

value of the claimed exemption he could have asked for a hearing on the issue, or asked for an

extension of time.62 The trustee argued that such a rule will create improper incentives and

encourage debtors to claim improper exemptions on the chance that a party in interest will fail to

56 Id. at 294. If the debtor’s lawsuit had been considered one for lost wages, § 522(d)(11) provides that the debtor may exempt her right to receive “a payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor. 11 U.S.C. § 522(d)(11)(E). 57 In re Davis 118 B.R. 272 (WD Pa. 1990). 58 Taylor v. Freeland & Kronz, 938 F.2d 420, 424 (3d Cir. 1991). The Third Circuit surveyed and examined three approaches taken by courts in ruling on the matter. The first, a literal approach that strictly enforces the 30 day requirement; second, a requirement that a claimed exemption must have a statutory basis in order to be exempt if no party in interest objects within the 30 day period (adopted by the bankruptcy court in this matter); and third, a good faith statutory basis standard, which allows a court to uphold the claimed exemption if there is a good faith basis for it (the standard previously adopted by the 6th and 8th Circuits). Id. at 423-24 (citations omitted). 59 Id. at 426. 60 See Taylor, 503 U.S. at 642-44. 61 Id. at 644. 62 Id. Rule 4003(b) permits a party in interest to ask the bankruptcy court for an extension of time. See FED. R. BANKR. P. 4003(b).

11

object.63 However, the Court found that the Bankruptcy Code adequately covered improper

conduct. For example, § 727(a)(4)(B) authorizes a denial of discharge if the debtor knowingly

and fraudulently presented or used a false claim and 18 U.S.C. § 152, which imposes criminal

penalties for fraud in bankruptcy cases.64

In the end, the Court’s ruling in Taylor led to a split among the Circuits and paved the

way to allow some unscrupulous conduct and gamesmanship by debtors depending on the

jurisdiction in which they reside.

B. In Re Wick

In In re Wick, the debtor filed a Chapter 7 bankruptcy petition in July of 1997.65 On

Schedule C, the debtor described the property as stock options, exempt under the wildcard

provision of Section 522(d)(5).66 The debtor listed the current value of the property as

“unknown” and the value of the claimed exemption as “unknown.”67 At the meeting of creditors,

the trustee received copies of the employment agreement that detailed the aforementioned stock

options, but did not object at that time.68 The debtor received a discharge in November of

1997.69 In October of 1998, the debtor filed suit against her former company requesting a court-

ordered buyout of the stock.70 The state court granted the buyout and valued the options at

63 See Taylor, 503 U.S. at 644. 64 Id. 65 See, In Re Wick, 276 F.3d 412, 413 (8th Cir. 2002). 66 Id. at 414. 67 Id. The stock options stemmed from the sale of the debtor’s company and required her to remain employed by the company for one year. At issue in this case, not pertinent to our discussion, was what portion of the stock options became part of the bankruptcy estate under Section 541(a)(1), which includes in the estate all legal and equitable interest of the debtor in property as of the commencement of the case, and what portion would be assigned to the debtor as earnings from services performed by an individual debtor after the commencement of the case under Section 541(a)(6). The court held that the bankruptcy estate’s interest was limited to the pro rata portion of the proceeds, from the liquidation sale of the stock options that are related to the debtor’s pre-petition services. The court further determined that one third represented the pro rata portion that the estate was entitled to as pre-petition earnings. Id. at 415-17. 68 Id. at 414. 69 Id. 70 Id.

12

$97,200.71 The trustee then petitioned to re-open the debtor’s bankruptcy case, demanding

turnover of the $97,200 less the $3,925 exemption to which she was entitled.72

In a well-reasoned opinion the bankruptcy court held that Taylor was not applicable.73

Because the debtor listed a valid statutory basis for the exemption claimed (unlike the debtor in

Taylor) she “indicated that she did not intend to claim an exemption any greater than the dollar

value allowed by that particular statute [§ 522(d)(5)].”74 As such, the trustee’s failure to object

did not turn the exemption into one for the entire asset rather than the specified dollar limit.75

The district court reversed finding Taylor to be directly applicable.76 According to the district

court, because the trustee made no objection to the exemption claimed within the 30-day time

period, the stock options became exempt in full.77

Reversing the decision of the district court, the Eighth Circuit rejected the contention that

listing the current value of the property as “unknown” is sufficient to make an asset fully

exempt.78 Instead, the court reasoned that it “may signal nothing more than that the asset has not

been valued or that the debtor is unsure of how to come up with an accurate market value.”79

The court went on to explain that “when a specific dollar figure given by statute limited the

amount of the exemption, and the trustee did not forsake an interest in the options, either through

inadvertence or misjudgment, listing “unknown” does not, by itself, render the options fully

71 Id. 72 See, In re Wick, 276 F.3d at 414. The $3,925 amount represents the amount that the debtor had remaining under Section 522(d)(5) that she could have used to exempt “any property” under the wildcard provision “[g]iven the dollar limitations then applicable and the other items claimed as exempt under § 522(d)(5).” See In re Wick, 249 B.R. 900, 905 (Bkrtcy. D. Minn. 2000). Each dollar amount listed in Section 522 is subject to change every three years to reflect the change in the Consumer Price Index for All Urban Consumers, published by the Department of Labor. 11 U.S.C. § 104. 73 See, In re Wick, 276 F.3d at 418. 74 See In re Wick, 249 B.R. at 913. 75 Id. The bankruptcy court went on to posit that the trustee had no basis for objecting to the claimed exemption because it was valid and within the allowed dollar amount. 76 See In re Wick, 256 B.R. 618, 625 (D. Minn. 2001). 77 Id. 78 See In re Wick, 276 F.3d at 416. 79 Id.

13

exempt.”80 The Court reasoned that Taylor did not apply because Wick intended to only

partially exempt the claimed asset, in contrast to Taylor who, in fact, claimed the full amount as

exempt.81 Consequently, the stock options were partially exempt up to $3,925 and the resulting

proceeds were property of the estate.82

C. In Re Reilly and Exemptions “In Kind”

The Third Circuit also had the opportunity to interpret Taylor after a trustee failed to

object to a claimed exemption within the 30-day period. In Reilly, the debtor filed a Chapter 7

bankruptcy petition in April of 2005.83 The debtor claimed an exemption in certain business

equipment used for her catering business.84 On Schedule C, the debtor indicated the current

value of the property as $10,718.85 She listed the value of the claimed exemption also as

$10,718, “asserting $1,850 of it under 11 U.S.C. § 522(d)(6) and $8,868 under 11 U.S.C. §

522(d)(5).”86 No objection was made by the trustee or a party in interest within the 30-day time

period of Rule 4003(b).87

Subsequently, the trustee had the business equipment appraised for $17,200.88 On

August 10, 2005, the trustee moved to sell the business equipment, subject to the debtor’s partial

80 Id. See also In re Cormier, 382 B.R. 377, 405 (W.D. Mich. 2008) (interpreting Wick as standing “for the proposition that when there exists a specific dollar limit in the statute, listing the current market value [in column 4 of Schedule C] does not result in the asset become fully exempt.” Id. 81 See In re Wick, 276 F.3d at 417-18. 82 Id. See also note 60, supra. 83 In re Reilly, 534 F.3d 173, 174. 84 Id. 85 Id. 86 Id. Section 522(d)(6) allows a debtor to exempt up to $2,025 in value, in any implements, professional books, or tools, of the trade of the debtor. Section 522(d)(5), commonly known as the “wildcard provision”, allows a debtor to exempt her interest in any property, not to exceed in value $1,075 plus up to $10,125 of any unused amount of the exemption under Section 522(d)(1) (the homestead exemption). These figures indicated in this footnote reflect the dollar amounts allowed as of April 2007, not the relevant 2005 figures applicable when this debtor filed. Dollar amounts are adjusted periodically and will change again in March 2010. See 11 U.S.C. § 522(d)(1) note 1. 87 In re Reilly, 534 F.3d at 174. 88 Id.

14

exemption.89 The debtor, citing Taylor, argued that the business equipment was fully exempt

because the trustee failed to object, and thus was not subject to liquidation and distribution. The

bankruptcy court agreed with the debtor, and determined that the property was fully exempt.90

The district court for the middle district of Pennsylvania denied the appeal.91 The trustee

appealed to the Third Circuit.

On appeal, the Third Circuit framed the issue as follows: “whether a Chapter 7 trustee

who does not lodge a timely objection to a debtor’s exemption of personal property may

nevertheless move to sell the property if he later learns that the property value exceeds the

amount of the claimed exemption.”92 The trustee argued that Taylor was not controlling because

it did not address whether a debtor’s valuation of property claimed as exempt becomes

conclusive in the absence of a timely objection.93 After recognizing a split of authority, the

Third Circuit disagreed, reasoning that Taylor stands for the proposition that “where the debtor

signals her intention to exempt certain property in its entirety by listing an identical entry for the

property’s value and the amount of the exemption, the trustee must object pursuant to Rule 4003

lest the property be rendered fully exempt.”94 According to the court, because the debtor listed

the value of the business equipment as $10,718, and the amount of the claimed exemption as

$10,718, the trustee was on notice that the debtor intended to exempt the property in full.95

Having notice of the debtor’s intention, the trustee should have had the business equipment

89 In re Reilly, 403 B.R. 336, 337 (M.D. Pa. 2006). 90 Id. 91 See generally, In Re Reilly, 403 B.R. 336 (M.D. Pa. 2006). 92 In re Reilly, 534 F.3d at 174. 93 Id. at 178. 94 Id. at 179. 95 Id. at 178.

15

appraised, sought a hearing under 4003(c)96 or requested an extension of time.97 The trustee’s

failure to object rendered the property fully exempt, regardless of the property’s ultimate market

value.98

The Third Circuit does not stand alone in its interpretation of Taylor. The Eleventh

Circuit and a Sixth Circuit Bankruptcy Appellate Panel also share this interpretation. In contrast,

the Eighth Circuit’s interpretation is in accordance with the First and Ninth Circuits.99 The

circuit split along with the gamesmanship invited by the Third Circuits holding and the practical

implications makes this issue ripe for determination. Indeed, the Supreme Court agrees and has

granted the trustee’s petition for writ of certiorari.100

III. THE DECISION

Taylor has been universally recognized and applied by bankruptcy courts. On appeal to

the Supreme Court, neither party in In re Reilly argues that Taylor should be overruled; rather,

they disagree as to the application of the decision.101 The Court’s decision will depend

significantly on interpreting the Bankruptcy Code’s provisions and distinguishing its decision in

Taylor. The issue presented must be decided by the Court in accordance with the plain meaning

of the text. In addition, each section must not be read in isolation, rather the statute’s full text,

language and structure must be accounted for to properly implement the intent of Congress.

A. In re Reilly Fails to Give Effect to the Language of the Statute 96 This subsection governs any objection made by a party in interest under FRBP 4003. A party objecting to an exemption bears the burden of proof to show that the exemption is not properly claimed. See FED. R. BANKR. P. 4003(c). 97 In re Reilly, 534 F.3d at 178. 98 Id. 99 See generally, In re Green, 31 F.3d 1098 (11th Cir. 1994); In re Anderson, 377 B.R. 865 (B.A.P. 6th Cir. 2007); In re Hyman, 967 F.2d 1316 (9th Cir. 1992); In re Barroso-Herrans, 524 F.3d 341 (1st Cir. 2008). 100 See In re Reilly, 534 F.3d 173 (3d Cir. 2008), cert. granted, 77 U.S.L.W. 3267 (U.S. Apr. 27, 2009) (No. 08-538). 101 Brief of Petitioner at 26, Schwab v. Reilly, No. 08-538 (July 10, 2009) (arguing that Taylor is distinguishable from the case at hand and the court of appeals’ holding that Taylor controls the disposition of this matter misunderstands the facts and reasoning of that decision); Brief for Respondent, at 2-3, Schwab v. Reilly, No. 08-538 (Sept. 18, 2009) (arguing that this case is a nearly identical issue and presents an “even more compelling candidate for the same result.”).

16

In order to resolve the dispute over the meaning of Section 522(l), the language of the

statute must be first examined.102 Where the meaning of the statute is unambiguous, then the

inquiry has ended and the sole function of the court is to enforce the statute according to its

terms.103 Every word of the statute shall be given effect.104 “The plain meaning of legislation

should be conclusive, except in the ‘rare cases in which the literal application of a statute’ will

produce a result demonstrably at odds with the intentions of its drafters.’”105

The relevant language at issue is Section 522(l), which reads as follows: “The debtor

shall file a list of property that the debtor claims as exempt under subsection (b) of this section.

If the debtor does not file such a list, a dependent of the debtor may file such a list, or may claim

property as exempt from property of the estate on behalf of the debtor. Unless a party in interest

objects, the property claimed as exempt on such list is exempt.”106 Bankruptcy Rule 4003 gives

an interested party, specifically the trustee, 30-days from the Section 341(a) meeting of creditors

to object to the list of property claimed as exempt.107 The language of Section 522(l) is

unambiguous and should be interpreted according to its plain meaning. Taylor v. Freeland &

Kronz determined this statute and its clarifying rule to be unambiguous and therefore, applied its

plain meaning.

In Taylor, the debtor claimed certain property as exempt, to wit, the expected proceeds

from an employment discrimination claim against her former employer.108 The trustee failed to

object within the time prescribed by Bankruptcy Rule 4003(b).109 Consequently, the Court ruled

102 See U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989). 103 Id. (interpreting § 506(b) to authorize payment of post petition interest on allowed nonconsensual oversecured claims). 104 See Rake v. Wade, 508 U.S. 464, 471 (1993). 105 Id. at 242 (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982). 106 See 11 U.S.C. § 522(l) (italics supplied). 107 See FED. R. BANKR. P. 4003. 108 See Taylor, 503 U.S. at 640. 109 Id.

17

that by operation of Section 522(l) (in conjunction with Rule 4003(b)), the property claimed as

exempt was exempt, even though the debtor had no colorable basis for claiming the

exemption.110 This is the holding of Taylor, as it was the only issue addressed by the Court.111

Applying the foregoing to the facts of In re Reilly, the Court should come to a similar

conclusion. In In re Reilly, the debtor claimed certain property as exempt, to wit, business

equipment.112 Just as the trustee in Taylor, the trustee failed to object within the time prescribed

by Bankruptcy Rule 4003(b). However, the difference between Taylor and In re Reilly is the

consequence of the trustee’s failure to object.113 In Taylor, the trustee lodged an untimely

objection to the property, because the debtor had no colorable basis for claiming it.114 Under a

plain meaning approach to Section 522(l), the trustee’s failure to object to the property rendered

the property exempt.115 Thus the Court performed its proper function enforcing the statute

according to its terms.116 In contrast, the debtor’s claimed exemption in In re Reilly was proper

under Section 522(d)(5)’s wildcard provision and Section 522(d)(6)’s professional tools

exemption.117 In In Re Reilly the trustee did not object to the property, but rather to the valuation

of the property as claimed by the debtor.118 Accordingly, no objection under Section 522(l) was

proper or even required as the Third Circuit held.119 Any other reading fails to give effect to the

language of the statute.

110 Id. at 643-44. 111 Id. at 641 (As stated by the Court, the only issue was “whether the trustee may contest the validity of an exemption after the 30-day period if the debtor had no colorable basis for claiming the exemption.”). Id. 112 In re Reilly, 534 F.3d at 176. 113 See discussion supra, Part II.A. [possible discussion in this footnote as to why Taylor is factually wrong] 114 Taylor, 503 U.S. at 644. 115 See 11 U.S.C. § 522(l) 116 See supra note 85. 117 See generally 11 U.S.C. § 522(d)(5)-(6). 118 See discussion supra Part II.C. 119 See discussion supra Part II.C.

18

The trustee in In re Reilly (or for that matter any trustee in a similar situation where the

debtor properly claims an exemption) had no basis to object under Section 522(l). The

bankruptcy court in In re Wick made this same point. “The issue at hand is the valuation of the

property claimed exempt, not the validity of the exemption. The Trustee does not have and

could not have, an objection to the validity of Wick’s exemption because [§ 522(d)(5)] allows

her to exempt any type of property.” 120 The Third Circuit’s interpretation of Section 522(l)

expands the scope of the statute beyond its plain meaning. According to the Third Circuit, not

only does Section 522(l) require the debtor to file a list of property claimed as exempt, it also

requires the debtor to file a list of the value of such property. Section 522(l) simply does not

require this result.

While it may be true that Schedule C requires the debtor to describe the property as well

as the value of the claimed exemption and the current value of the property without deducting the

exemption, the statute, Section 522(l), does not require the debtor to do so.121 Bankruptcy Rule

9009 provides that Official Forms prescribed by the Judicial Conference of the United States

shall be observed and used.122 However, these rules and forms shall not abridge, enlarge, or

modify any substantive right.123 The Third Circuit’s transformed the language of Section 522(l)

as follows: if a party in interest objects to anything listed on Schedule C, including the value of

the claimed exemption, he or she must object or the property and its attendant value figures are

determinative and controlling. In In re Reilly, the debtor interprets Section 522(l) one step

120 In re Wick, 249 B.R. 900, 913 (Bkrtcy. D. Minn. 2000). See also In re Hyman, 967 F.2d 1316, 1319 (9th Cir. 1992) (indicating on similar facts that the trustee had no basis for objection, and if he had objected the trustee may have suffered the judge’s “ire” because the debtor’s were clearly entitled to the exemption); Brief of the National Association of Bankruptcy Trustees as Amicus Curiae in Support of the Petitioner, at 11-13, Schwab v. Reilly, No. 08-538 (Sept. 18, 2009) (arguing that requiring a trustee to object to a properly claimed exemption simply because the exemption claimed equals the listed value would make a mockery out of any notion of efficiency that the official forms strive to achieve). 121 See generally Official Form 6C. 122 FED. R. BANKR. P. 9009. 123 28 U.S.C. § 2075.

19

further, stating that “[a] trustee who wishes to preserve any potential right to deprive a debtor of

an asset claimed as exempt must object where, as here, the debtor does not concede in his or her

schedules that the value of the relevant assets exceeds the amount claimed as exempt.”124 Such a

reading is prohibited by the language of Section 522(l) itself and surely would abridge, enlarge

or modify substantive rights of both parties in interest and debtors in contravention of 28 U.S.C.

§ 2075.125 Under the Third Circuit’s interpretation, a debtor’s substantive right to exempt

property would be enlarged, beyond what Section 522(d) allows. Substantive rights of creditors

to have property sold and proceeds distributed to them would also be diminished. This

interpretation is not sanctioned by the Bankruptcy Code, the Bankruptcy Rules or Schedule C for

that matter.

The information provided by Schedule C may be nothing more than an administrative

convenience to the trustee, helping him or her evaluate the propriety of the claimed exemption.126

At least one court has agreed:

The fourth column requires the debtor to state “Current Value of Property Without Deducting Exemption.” This information is not required by § 522. This court believes the total value of the property in Column 4, as contrasted to the value (amount) claimed as exempt in Column 3, is likely included for the administrative convenience of the parties in interest. By comparing the figures in Column 3 and Column 4, one can easily see whether (according to the debtor’s value estimation) the property may be administered for the benefit of the estate. . . . The current value “bonus information in Column 4 of Schedule C may not be used, and should not be used, to determine “the property claimed as exempt” for purposes of § 522(l).127

124 Brief for Respondent at 38, Schwab v. Reilly, No. 08-538 (Sept. 18, 2009). It should be noted that assets are property of the estate under Section 541(a) as of commencement of the case, they no longer property belonging to the debtor. The trustee does not have merely a potential right to the property, he has an absolute right to the property that is property of the estate. 125 See discussion supra, Part I.B. 126 See 5 Collier on Bankruptcy ¶ 522.05. See also Brief of the National Association of Bankruptcy Trustees as Amicus Curiae in Support of the Petitioner, at 11, Schwab v. Reilly, No. 08-538 (Sept. 18, 2009) (arguing that the forms used in bankruptcy proceedings produce efficiency, minimize costs and expenses and speeds up the decision making process). 127 In re Cormier, 382 B.R. 377, 395 (W.D. Mich. 2008).

20

Other courts have wrongly extended Taylor. The Ninth Circuit BAP’s decision is

representative. “Given Taylor, a distinction can no longer be drawn between objecting to an

exemption itself and objecting to the value of the property subject to an exemption. All

objections to exemptions are subject to Rule 4003(b). Taylor made it clear that the purpose for

the short objection period in Rule 4003(b) is to encourage finality. Allowing a trustee to

distinguish between an objection to an exemption itself and the value of the property subject to

that exemption does not promote finality.”128 Such a broad reading is inconsistent with general

principles of statutory interpretation. “Where Congress includes particular language in one

section of a statute but omits it in another section of the same Act, it is generally presumed that

Congress acts intentionally and purposely in the disparate inclusion or exclusion.”129 Section

522(l) requires a party in interest to object to the property claimed as exempt.130 Conspicuously

absent in the statute is the requirement that a party in interest object to the value of the property

claimed as exempt. A cursory review of the statute reveals that Congress knows how to use the

word “value.” In fact, the word “value” is used nine times in Section 522(d) alone.131 In

addition, Congress also combined the words “property” and “value” in this statute on more than

one occasion. For example, Section 522(d)(5) the debtor may exempt his or her “aggregate

interest in any property, not to exceed in value $1,075 plus up to $10,125 of any unused amount

of the exemption provide under paragraph (1) of this subsection.”132 Congress specifically chose

to include the words value and property in one section of the same statute and chose to omit the

combination in Section 522(l). It is therefore presumed that Congress acted intentionally and

128 In re Morgan-Busby, 272 B.R. 257, 265 (9th Cir. BAP 2002) (citations omitted). 129 Russello v. U.S., 463 U.S. 16, 23 (1983). 130 See 11 U.S.C. § 522(l). 131 See generally 11 U.S.C. § 522(d). 132 11 U.S.C. § 522(d)(5).

21

purposely in the inclusion of the word “property” in Section 522(l) and the exclusion of the word

“value”.133

The often cited canon of construction expressio unius est exclusio alterius, meaning

expression of the one is the exclusion of the other, is helpful to interpret Section 522(l). “What it

means is this: If you see a sign that says children under twelve may enter free, you should have

no need to ask whether your thirteen-year-old must pay. The inclusion of one class is an explicit

exclusion of the other.”134 Congress spoke clearly when it included the word property and

excluded the word value from Section 522(l). Indeed the two objections, one to the property

claimed as exempt and the other to the value, are separate and distinct; they each serve

competing interests.135 The objection to property claimed as exempt gives the debtor a prompt

determination as to his rights in property.136 In contrast, the objection to valuation allows

creditors to obtain a fair valuation of the property for payment of their allowed claims.137

Accordingly, because the intent of Congress is clear from the statutory text this is the end of the

matter and the trustee does not waive an objection to the value of property if he or she fails to

object within 30-days of the Section 341(a) meeting of creditors.138

B. Monetary Limitations and the Standard for Valuation of Exempt Property Preclude Application of Taylor in this Context. Simply stated Taylor does not control the outcome of In re Reilly. The Third Circuit

understood Taylor to stand for the proposition that “where a debtor signals her intention to

133 See supra note 102. 134 ANTONIN SCALIA, A MATTER OF INTERPRETATION: FEDERAL COURTS AND THE LAW 25 (Amy Gutmann ed., Princeton University Press) (1997). 135 In re Hyman, 123 B.R. 342, 348 (B.A.P. 9th Cir. 1991). 136 Id. See also Taylor, 503 U.S. at 644 (reasoning that strictly enforcing Rule 4003’s 30-day provision may lead to unwelcome results, but it produces finality). 137 Id. 138 See generally, Chevron U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842 (1984). See also Addison v. Reavis, 158 B.R. 53, 60-61 (E.D. Va. 1993) (recognizing a distinction between objecting to property claimed as exempt and the value of such property claimed as exempt. Holding that only an objection to property claimed as exempt must be made within Rule 4003(b)’s 30 day period).

22

exempt certain property in its entirety by listing an identical entry for the property’s value and

the amount of the exemption, the trustee must object pursuant to Rule 4003 lest the property be

rendered fully exempt.”139 Even assuming that a debtor signals her intention to exempt property

in its entirety by listing an identical value for the property and the amount of the exemption, it

does not follow that the property becomes fully exempt. Such an interpretation not only fails to

give effect to the language of Section 522(l), as discussed supra Part IV.A, but also fails to give

effect to other provisions of the Bankruptcy Code limiting the amount of exemptions and the

standard for valuation. Moreover, such an interpretation is incompatible with the policy

underlying the Bankruptcy Code.

1. Specific Limits Established by Congress in Section 522(d) preclude the Application of Taylor as Interpreted by the Third Circuit

According to the Supreme Court, statutory construction is a holistic endeavor and must

account for the statute’s full text, language, structure and subject matter.140 It has been stressed

that “in expounding a statute, we must not be guided by a single sentence or member of a

sentence, but look to the provisions of the whole law, and to its object and policy.”141 The Third

Circuits’ interpretation of Taylor fails to account for the statute’s full text, its object and policy,

specifically by ignoring the monetary limitations imposed by Section 522(d).

Section 522(d) places monetary limitations on certain categories of property that the

debtor may exempt.142 For example, a debtor may exempt his or her aggregate interest, not to

exceed $20,200 in value, in real or personal property that the debtor uses as a residence; up to

$3,225 in one motor vehicle, $10,775 in consumer goods such as household furnishings143, and

139 In re Reilly, 534 F.3d at 179. 140 See U.S. Nat. Bank of Oregon v. Independent Ins. Agents of America, Inc. 508 U.S. 439, 455 (1993). 141 Id. See also United States v. Heirs of Boisdore, 49 U.S. 113, 122 (1849). 142 See generally 11 U.S.C. § 522(d). 143 But the particular item may not individually exceed $525. 11 U.S.C. § 522(d)(3).

23

$2,025 in tools of the trade144 On the other hand, Congress chose to allow a debtor to exempt

certain classes of property in full, regardless of value. Items such as professionally prescribed

health aids, social security benefits, unemployment compensation, alimony and support

payments, and certain retirement funds are entirely exempt.145 The fact that Congress chose to

include monetary limitations on certain categories of property and not others, in the same statute,

must mean something.146 Section 522(l) should not be read to limit the application of Section

522(d). If Section 522(l) is interpreted to allow a debtor to exceed these monetary limitations,

we fail to give effect to the statute’s full text, its object and policy.

The debtor in In re Reilly argues that if Congress had intended to limit the property

claimed as exempt on a debtor’s schedules to the amount stated in Section 522(d), it could have

done so expressly.147 The debtor believes that Congress’ failure to include similar limitations in

Section 522(l) is determinative and a court should not infer that limitations exist.148 This

argument reads Section 522(l) in isolation and fails to account for the full text of the statute,

including Section 522(d). “A standard principle of statutory construction provides that identical

words and phrases within the same statute should normally be given the same meaning.”149 The

Bankruptcy Code should not be read as a series of unrelated and isolated provisions; identical

words used in different parts of the Bankruptcy Code should be interpreted to have the same

meaning.150 This principle applies here.

144 See 11 U.S.C. § 522(d)(1)-(6). Other property also contains monetary limitations on property to be exemption such as the debtors interest in the cash value of a life insurance policy or payment on account of personal bodily injury not including pain and suffering or compensation for actual pecuniary loss. See 11 U.S.C. § 522(d)(8)-(11). 145 See 11 U.S.C. § 522(d)(10)-(11). 146See generally Russello v. U.S., 463 U.S. 16, 23 (1983). 147 Brief for Respondent at 39, Schwab v. Reilly, No. 08-538 (Sept. 18, 2009). 148 Id. at 40. 149 Powerex Corp. v. Reliant Energy Services, Inc., 551 U.S. 224, 232 (2007). 150 See generally Gustafson v. Alloyd Co. Inc., 513 U.S. 561, 570 (1995).

24

Section 522(d) lists property that may be exempted by a debtor under Section 522(b)(2),

the federal exemptions.151 Monetary limitations are placed on certain classes of property and not

others.152 Section 522(l) qualifies this provision and requires a debtor to submit a list of the

property that a debtor claims as exempt under subsection (b).153 In order to file a list of property

in accordance with Section 522(l), the debtor must first reference Section 522(b), which explains

that a debtor may exempt from property of the estate property listed under subsection (d). The

debtor’s argument in In re Reilly that if Congress had intended to limit the effect of Section

522(l) in accordance with a value limit set forth elsewhere in the statute (i.e. Section 522(d)),

they would have done so expressly154, is simply without merit. Unlike debtor’s contention

Congress did limit the effect of Section 522(l) to actual or stated values by specifically requiring

a debtor to file a list of property claimed as exempt under subsection (b). Subsection (b)

specifically incorporates Section 522(d).155 Requiring Section 522(l) to expressly duplicate the

limitations provided for in Section 522(d) would be unnecessary and cumulative. The term

property must be defined by reference to Section 522(d) and its attendant monetary limitations,

otherwise identical words and phrases within Section 522 are given different meanings. Taylor

does not change this result.

Taylor must be read “as referring in context to circumstances similar to the circumstances

then before the Court and not referring to quite different circumstances that the Court was not

then considering.”156 The issue, as framed by the Court, was whether the trustee may contest a

claimed exemption after the 30-day objection period has run if the debtor had no colorable basis

151 11 U.S.C. § 522(d). 152 Id. 153 11 U.S.C § 522(l). 154 See supra note 147-48. 155 11 U.S.C. § 522(b)(2). 156 Illinois v. Lidster, 540 U.S. 419, 424 (2004).

25

for claiming the exemption.157 The debtor had no colorable basis for the exemption because the

basis of the claimed exemption was a tort suit, for which no exemption exists under Section

522(d).158 Under Taylor, it would not have mattered if the debtor listed the value of the claimed

exemption as unknown or for one million dollars. Regardless of the amount claimed or the fact

that the amount claimed matched the exemption claim, the property claimed as exempt was

improper. There was no discussion, nor did the Court’s holding rest on the fact that a debtor

signaled some sort of intention to exempt the property in full by listing an identical entry for the

property’s value and amount of exemption.159

In In re Reilly, the debtor filed a list of property that she claimed as exempt under

subsection (b). In order to determine what property that she was entitled to exempt under the

statute, she referenced subsection (d), which enabled her to claim an exemption in specific

business equipment.160 Unlike the debtor in Taylor, the exemption listed was valid and the

trustee had no basis for objecting. In order for the statute’s full text to be accounted for, we must

give effect to the monetary limitations provided for in Section 522(d). Accordingly, the debtor

should be limited to the amount of the claimed exemption to which she was entitled, $10,718.161

2. Fair Market Value as the Standard for Valuation

The Bankruptcy Code defines value as “fair market value as of the date of the filing of

the petition or, with respect to property that becomes property of the estate after such date, as of

157See Taylor, 503 U.S. at 639. 158 See discussion supra Part II.A. 159 See generally Taylor, 503 U.S. at 640-44. See also In re Cormier, 382 B.R. 377, 405 (W.D. Mich. 2008) (“The unstated premise in Taylor is limited: when a debtor claims property as fully exempt, and no objection is timely filed, the property is exempt. However, other than this remise, the Supreme court was not called upon to interpret the exemption statute, included § 522(d), nor did it even discuss it, except perhaps in passing. In Taylor there is no statutory analysis, much less any holding, about what property is “claimed exempt” and how a debtor may claim an “in kind” exemption to assert the entire property as exempt.”). 160 See In re Reilly, 534 F.3d at 174. The debtor also claimed part of the business equipment as exempt under Section 522(d)(5)’s wild card provision in the amount of $8,868, an amount accounting for the value of any unused amount of the exemption provided under Section 522(d)(1)’s homestead exemption. Id. 161 In re Reilly, 534 F.3d at 174.

26

the date such property becomes property of the estate.”162 Fair market value is defined as the

price that a buyer is willing to pay and a seller willing to accept on the open market and in an

arms length transaction.163 Because fair market value will not be determined until there is a sale

of the property, allowing an exemption “in kind” based on the debtor’s estimated valuation of the

property matching the claimed exemption is inconsistent with the notion that value is to be

determined by a property’s fair market value.

After notice and hearing, the trustee may use, sell, or lease property of the estate.164 The

primary role of the trustee is to liquidate the debtor’s assets in a manner that maximizes return

for creditors.165 In order to conduct a sale a trustee must first obtain a written appraisal of the

property, unless there is an established market for the property.166 With the court’s approval a

trustee may employ an appraiser to assist the trustee in determining value.167 After notice and

hearing to all interested parties the trustee may then conduct a sale through public auction or

private sale.168 To prevent collusive bidding courts may require that the sale be publicly

advertised.169 After sale of property, the trustee is required to file a report with the Bankruptcy

Court that includes an itemized statement of the property sold; list of bidders; the name of the

purchaser; the price received for each item; the date, time and place of sale; compensation paid

162 11 U.S.C. § 522(a)(2). 163 BLACK’S LAW DICTIONARY 754 (3rd pocket ed., 2006). However, some courts have determined that fair market value must take into account the liquidation context of a Chapter 7 liquidation case and hold that fair market value is equivalent to liquidation value. See generally, In re Walsh, 5 B.R. 239 (Bankr. D.D.C. 1980). Cf. In re Mitchell, 103 B.R. 819 (Bankr. W.D. Tex. 1989) (holding that the appropriate valuation standard is fair market value, in accordance with the plain meaning of the statute). 164 11 U.S.C. § 363(b)(1). 165 www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter7.html#trustee (last visited Feb. 20, 2010). 166 1 BANKRUPTCY PRACTICE HANDBOOK § 7.47 (2d ed.). 167 Id. See also 11 U.S.C. § 327(a). 168 1 BANKRUPTCY PRACTICE HANDBOOK § 7.47 (2d ed.). 169 Id.

27

to professional person conducting sale (i.e. auctioneer); copies of sale advertisements; and a list

of all sale expenses.170

Surely this procedure was not intended by Congress or the courts to be circumvented by a

debtor’s mere listing of property and estimation of value on Schedule C. In order to determine

the value of the property to be exempted under Section 522(d), which is the fair market value,

the trustee must conduct a sale or at a minimum an appraisal of the property. Only then will

creditors receive the process to which they are entitled for payment of their claims. “Although

objections to the exemptions themselves should be made as quickly as possible, the ‘objections

to valuation, on the other hand, need not be completed with such expediency, nor should the

creditor be required to rush out and value the debtor’s property in order to protect his interests in

that property.’”171

Returning to the facts of In re Reilly, the absurdity that would result if a debtor’s estimate

of the property’s value were to become conclusive proof of its fair market value is obvious. In In

re Reilly, the debtor listed her business equipment with a value of $10,718.172 The business

equipment consisted of catering utensils and instruments.173 Unlike other types of property, such

as stock, whose value may be determined by the stock market, or cars whose value may be

reliably determined by reference to a website such as Kelly Blue Book, there is no readily

established market for catering utensils and instruments. In order to determine the true value of

this property with no established market, it becomes increasingly important to have the

equipment appraised by a professional or sold in a private or public auction. Indeed, the trustee

sought an appraisal of the business equipment in this case. The business equipment appraised for

170 See Local Rule (Bankr. W.D. Mich.) 6004. 171 See In re Hyman, 123 B.R. 342, 348 (B.A.P. 9th Cir. 1991) (quoting In re Allen, 44 B.R. 38, 40 (Bkrtcy. N.M. 1984). 172 In re Reilly, 534 F.3d at 174. 173 Id.

28

$17,200, 60% more than the value the debtor had listed for the property.174 This conclusively

shows the fallibility of relying on a debtor’s estimation of the property, especially in undefined

markets. Accordingly, Congress chose to equate the value of property by reference to the fair

market value, rather than the value estimated by the debtor.175 While a court may, in its

discretion, accept an estimate of fair market value from the debtor, a sale or appraisal in excess

of an estimate is significantly more reliable evidence of value as defined by Section 522(a)(2).176

CONCLUSION

In 2008, there were 744,424 Chapter 7 filings.177 714,389 of those were individual

filings.178 In the midst of a recession, unemployment rates at staggering numbers and an

accompanying housing market crash we can only expect that more individuals will seek

protection under the Bankruptcy Code. The American Bankruptcy Institute estimates that filings

will surpass 1.4 millions in 2009 alone.179 As more and more cases are filed each month it

becomes imperative that a trustee is able to rely on properly submitted forms and schedules of

the debtor. The practical reality is that not all debtors will be entirely truthful, honest or candid.

Requiring that a trustee objects in every instance where a debtor may have undervalued his or her

property would bring the system to a slow crawl.180 Implementation the Eighth Circuit’s

174 Id. 175 See 11 U.S.C. § 522(a)(2). 176 See generally, Fitzgerald v. Davis, 729 F.2d 306, 308 (4th Cir. 1984). 177 See USCourts.gov, BUSINESS AND NONBUSINESS BANKRUPTCY CASES COMMENCED, BY CHAPTER OF THE BANKRUPTCY CODE, DURING THE TWELVE MONTH PERIOD ENDED DEC. 31, 2008, available at http://uscourts.gov/bnkrpctystats/statistic.htm#calendar (last visited Feb. 20, 2010). 178 Id. 179 John Hartgen, November Consumer Bankruptcy Filings Drop 18 Percent from Previous Month, Dec. 2, 2009, http://www.abiworld.org/AM/Template.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=59380 180 See also In re Wick, 276 F.3d at 417 (noting that “[s]ince exemptions are routinely smaller than the assets they are designed to protect (for example, with homes), objections would multiply greatly if Taylor were read so broadly.”).

29

decision in In re Wick will ensure that debtors and creditors are treated fairly in the system, and

will not reward those who try and take advantage of its perceived technicalities.

In In re Reilly, the Supreme Court should hold that if the value of the property claimed as

exempt exceeds the monetary limitations of Section 522(d), only to the extent of the monetary

limitations is the property exempt, regardless if the trustee has objected within the 30-days

provided for by Rule 4003(b). This holding is consistent with the plain meaning of Section

522(l), which only requires a party in interest to object to the property claimed as exempt and not

to the valuation of that property. In addition, this holding accounts for the Bankruptcy Code’s

full text rather than reading provisions in isolation. A contrary holding would disregard the

specific monetary limitations imposed by Congress as well as the fair market value standard used

to determine the value of exempt property. In the end, bankruptcy is a privilege and not a right.

A debtor’s fresh start must yield to the countervailing principle of fair distribution to creditors

for the obligations and responsibilities incurred by a debtor.